Reducing the corporate tax rate

On 1 September 2016, the Government introduced Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 that proposed to progressively reduce the corporate tax rate from 30% to 25% for all corporate entities. The Bill was subsequently amended to apply to corporate entities with an aggregated turnover of less than $25 million for the 2017–18 income year and less than $50 million for the 2018–19 income year – known as base rate entities. Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 received Royal Assent on 19 May 2017.

Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 was introduced to the House of Representatives on 11 May 2017. If passed, it will increase the scope of which corporate entities will be eligible for the lower corporate tax rate in future years.

On 18 October 2017, the Government introduced the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017. If this receives Royal Assent, corporate entities with no more than 80% base rate entity passive income will be eligible for the lower corporate tax rate. The date of effect will be from the 2017–18 income year.

Enterprise Tax Plan 2016

Under the current law the following corporate tax rates apply.

Small business entities changes and timeframes

Year

Aggregated turnover threshold

(SBE) Corporate entities under the aggregated turnover threshold

All other corporate entities

2015–16

$2m

28.5%

30.0%

2016–17

$10m

27.5%

30.0%

Base rate entities changes and timeframes

Year

Aggregated turnover threshold

(BRE) Corporate entities under the aggregated turnover threshold

All other corporate entities

2017–18

$25m

27.5%

30.0%

2018–19

$50m

27.5%

30.0%

2019–20 to 2023–24

$50m

27.5%

30.0%

2024–25

$50m

27.0%

30.0%

2025–26

$50m

26.0%

30.0%

2026–27

$50m

25.0%

30.0%

The maximum franking credit that can be allocated to a frankable distribution paid by a corporate entity will be based on their applicable corporate tax rate for imputation purposes.

From the 2017–18 income year, a corporate entity works out their corporate tax rate for imputation purposes by:

assuming that their aggregated turnover, base rate entity passive income, and assessable income are the same as in the previous income year, and

applying the corporate tax rate for the current income year.

If the entity did not have a previous year, the corporate tax rate for imputation purposes will be 27.5%.

Enterprise Tax Plan No.2 2017

The Government introduced a second Bill that progressively extends the lower corporate tax rate to all corporate entities. The table below outlines the proposed changes and timeframes. This law has not yet passed.

Proposed changes and timeframes

Year

Aggregated annual turnover threshold ($m)

Entities under the threshold (base rate entities up to 2022–23)

All other corporate tax entities

2019–20

$100m

27.5%

30.0%

2020–21

$250m

27.5%

30.0%

2021–22

$500m

27.5%

30.0%

2022–23

$1b

27.5%

30.0%

2023–24

No threshold

27.5%

27.5%

2024–25

No threshold

27.0%

27.0%

2025–26

No threshold

26.0%

26.0%

2026–27

No threshold

25.0%

25.0%

Proposed amendment to limit the entities subject to the lower corporate tax rate

Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 amends the law to limit the lower corporate tax rate to base rate entities with no more than 80% passive income from 2017–18 to 2023–24.

Under the proposed law, a corporate entity is a base rate entity, and will receive the lower corporate tax rate from the 2017–18 income year, if they:

have no more than 80% base rate entity passive income. This income includes:

dividends other than non-portfolio dividends

franking credits on such dividends

non-share dividends

interest income, royalties and rent

gains on qualifying securities

net capital gains

income from trusts or partnerships, to the extent it is referable (either directly or indirectly) to an amount that is otherwise base rate entity passive income.

Administrative treatment

2016-17 corporate tax rate and franking issues

As there are no proposed changes to the law for the 2016–17 income year, companies are encouraged to lodge their tax returns under the existing law. To qualify for the lower 27.5% tax rate in 2016–17 a company must meet the small business entity definition which requires them to:

have an aggregated turnover of less than $10 million, and

be carrying on a business.

Note that the maximum franking credit that can be allocated to a distribution is based on a corporate tax entity's applicable corporate tax rate for imputation purposes. For the 2016–17 income year, a corporate entity works out their corporate tax rate for imputation purposes by:

assuming that their aggregated turnover is the same as in the previous income year, and

applying the corporate tax rate for the current income year.

If the entity did not have a previous year, the corporate tax rate for imputation purposes will be 27.5%.

They base their corporate tax rate for imputation purposes on the aggregated turnover for the previous year.

However, we understand that there has been some uncertainty about the 'carrying on a business' test and so we will adopt a facilitative approach to compliance in relation to the ‘carrying on a business’ test for the 2016-17 year. That is, we will not select companies, or their shareholders, for audit based on the company's determination of whether they were carrying on a business in the 2016-17 income year, unless that decision was plainly not reasonable.

Early consultation on the Ruling has highlighted a question about the provision around which the advice should be framed. The draft Taxation Ruling addresses whether a company is carrying on a business for the purpose of identifying whether it is a base rate entity in section 23AA of the Income Tax Rates Act 1986 (ITRA 1986). This is relevant for determining whether it is subject to the 27.5% or 30% corporate tax rate in the 2017/18 and later income years. The reasoning expressed in the Ruling is, however, equally applicable to determining whether a company is a small business entity within the meaning of section 23 of the ITRA 1986 and section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2015/16 and 2016/17 income years and therefore which rate is applicable to it in those income years.

In light of this and the proposed changes to the law, the Commissioner is proposing to finalise the draft Ruling in relation to section 23 of the ITRA 1986 and 328-110 of the ITAA 1997, rather than section 23AA of the ITRA 1986 as it is presently drafted.

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